Bonds have rallied since the minutes of the Fed’s July meeting, released on Wednesday, disappointed traders, who were looking for a clear signal on the likelihood of a September rate hike.
“We still think they’re going to raise in September”, Alberto Gallo, head of macro credit research at Royal Bank of Scotland Group Plc, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. It would be a “policy mistake” if the Fed raises rates in a few weeks, which could lead to more “market unrest”, he said.
The cost of how quickly investors and traders can convert a Treasury security into cash or vice versa is critical for financial markets because a U.S. government bond is considered the safest and most liquid in the world.
Ten-year notes also drew support from signs the Federal Reserve will keep interest rates close to zero for longer, and from a decline in oil prices that helped push a gauge of inflation expectations toward its lowest since 2010.
The extra yield on 10-year Treasury Inflation Protected Securities over those on conventional notes, a measure of the outlook for consumer prices over the life of the securities, dropped to as little as 1.56 percentage points Tuesday, the lowest since January 20. Now with the Fed planning to shift gears, investors are concerned whether these markets can hold up. Concerns about global growth come as data shows that U.S. growth is still strong. One concern is that the value of outstanding bonds would fall as higher interest rates from the Fed tend to make newly minted bonds more attractive for buyers. That’s partly because economists and market seers have been anticipating a rate increase for well over a year, and they’ve advised their clients to prepare their portfolios.
Treasury yields declined Monday, as weak economic data added to the downward pressures on yields caused by a global rout in oil prices.
In the 12 months through July, the CPI climbed 0.2 percent.
The trade is known as a flattening yield curve and it practically means that investors have been moving money over the last two months from short-term Treasury notes, such as the 2-year and the 5-year maturity, to long-term Treasurys, most notably the 30-year maturity.
The Fed is grappling with the fallout from plunging crude oil prices.
Yields, which move in the opposite direction of bond prices, fell in the morning, after a reading of manufacturing activity in the state of New York fell to its lowest level since April 2009.
Five-year securities rose 0.5 percent in the same period, and 10-year debt gained 1.3 percent.
The futures market reveals a 44% chance the Fed will hike benchmark interest rates at its September 16, 17 meeting based on assumptions that the effective fund rate will average 0.375%.